Financial update from the Provost and V-P (Academic) and V-P (Finance and Administration)

October 10, 2011

To the Queen's Community

As the university's Chief Budget Officer, the Provost is ultimately responsible for determining the budgets of both academic and service units at Queen's, but once we are into a budget year it falls to Finance to put the budget into effect. It is for this reason, among many others that the Provost and the Vice-Principal (Finance and Administration) work very closely together, and it is in this context that we jointly bring you the first financial update for this current academic year.

This update provides some details of the development of the budget for the next fiscal year (2012–2013), a brief report on the financial results for last year, and an assessment of progress on a number of major financial challenges that we face.

Budget for 2012–2013

At the May 2011 meeting of the Board of Trustees, we were instructed to deliver a balanced budget for 2012–2013. We presented our preliminary thinking on this to the Board Finance Committee in September, subsequent to which we issued planning and budget guidelines to academic and non-academic units. The budget parameters were as follows:

All units' 2012–2013 operating budgets will be unchanged from their 2011–2012 levels; this means that the previously announced across-the-board budget cut of 1.5 percent will not be applied.

All units will be responsible for increases in salary and benefit costs, including the special pension charge of three percent of pensionable earnings, up from one percent of pensionable earnings in 2011–2012.

The distribution of a portion of government grant and tuition revenue increases to faculties is suspended, pending the outcome of the development of a new budget model.

When the budget balances in 2012–2013, it will be for the first time in five years, and while this will be an important step, it will not in and of itself put Queen's on a sustainable financial footing.

The new budget model will be implemented for the 2013–2014 budget year, and will be driven by the principles of responsibility-centred management:

All costs and income attributable to each faculty and other academic unit should be assigned to that unit.

Appropriate incentives should exist for each academic unit to increase income and reduce costs to further a clear set of academic priorities.

University revenue totaled $743M, up by 1.1 percent over 2009–2010, and expenses (before the unrealized gain on derivatives) were $751M, up by 1.5 percent. The consolidated deficit was $4.4M, an improvement in comparison with the 2009–2010 deficit of $14.7M. The operating fund did a little better than budgeted, with a deficit of $2.0M compared to the $3.8M that had been originally approved by the Board of Trustees. The university's net assets increased by 3 percent or $22.6M, primarily as a result of endowment contributions and an increase in the unrealized gains on investments.

Investments

Previous updates have made mention of the effect of the gloomy global financial situation on our finances. At the end of April 2011, both the Pooled Endowment Fund (PEF) and the Pooled Investment Fund (PIF) were above their performance benchmarks, with the annual returns before fees standing at 11 percent for the PEF and 10.6 percent for the PIF. Despite this good performance, investment income decreased by $8.8M compared with 2009–2010.

In April 2011, global equity markets were still generally positive despite concerns for the security situation in North Africa and the Middle East, the ongoing financial problems in Europe, and the growing level of concern about the credit outlook for the US. Over the summer and into the fall, following Standard and Poor's downgrade of the US credit rating in August, and in light of the plight of the Euro, markets have been increasingly volatile and fears of a global recession have revived. Equity markets have tumbled, and interest rates are now even lower, so that our investment income for 2011–2012 is likely to decrease again unless things improve substantially.

Long-term Debt

The university has now locked in all the financing required for capital projects, and there are no further plans for borrowing against the operating fund income.

Queen's Pension Plan (QPP)

The April 2011 update talked about the challenge of reforming the Queen's Pension Plan. Important positive steps were taken in this context with the outcome of recent collective bargaining with our CUPE locals and with Queen's University Faculty Association. The changes agreed upon will make the plan sustainable going forward, and will qualify Queen's for the government's solvency relief program. Further information about changes to the Queen's Pension Plan can be found here.

This progress notwithstanding, the university will still be required to make large payments into the plan. Stage one of the provincial program requires interest payments on the solvency deficiency to be paid into the plan this year and additional going concern special payments commencing in 2012-13; stage two relief allows the university to spread its subsequent solvency payments over ten years beginning September 2015.

We will report in our next update on the results of the actuarial valuation of the plan as of August 31, 2011, which will reflect the above-mentioned changes made to the plan as well as the effect of decreased interest rates and the deteriorating financial situation over the last few months.

Outlook for 2011-12

The Board of Trustees reluctantly approved a deficit of $3M in the operating budget for 2011–2012. It is too early to tell how this fiscal year will turn out. Our next update will give you our best forecast for this year.

Final Word

Queen's student-centred and research-intensive mission relies on an effective budget allocation process, and on good financial management. We are committed to continuing to providing you with the information you need to understand the financial challenges the university faces. Working together with everyone at Queen's, we can overcome these challenges, and emerge stronger than ever.

Thank you for your interest in Queen's financial situation. If you have any questions please do not hesitate to contact us.